As Earnings Season Begins, Inflation and Supply Chain Cloud Outlook

Posted October 12, 2021 4:02 p.m. EDT

The delta variant of the coronavirus has hurt hiring and made policymakers’ lives more difficult. But investors are taking it in stride, because it appears to have had little effect on corporate profits.

Executives, having closed the books on the third quarter, may not be as buoyant as they were earlier in the year, with growing worries about supply chain issues and inflation slowing future profit growth.

Companies start reporting their third-quarter earnings this week, beginning with JPMorgan Chase and Delta Air Lines on Wednesday.

Bottom lines are expected to have risen substantially. Analysts predict that earnings for companies in the S&P 500 rose nearly 28% in the third quarter, compared with a year ago, which would be the third-highest increase since 2010. But that’s not necessarily a positive sign for the overall economy.

The sectors showing the biggest jumps in earnings are the few that benefit the most from inflation. Companies in the energy and materials sectors — like Exxon and Dow — are expected to report huge profit jumps for the third quarter. By contrast, companies that are reluctant to pass higher costs onto consumers, like Amazon and General Motors, are expected to have a disappointing quarter. Banks are in the middle, with trading businesses expected to fall short of last year’s windfall but consumer divisions picking up as the economy reopens.

Shortages and supply chain problems loom large. On the most recent earnings calls at S&P 500 companies, some 70% warned that supply chain issues would hamper sales and profits.

“If we had the capacity to meet all of the demand,” Sean Connolly, president and CEO of packaged food group ConAgra, told investors last week, “our numbers would likely have been even more impressive.”

Expect to hear more of this on third-quarter calls, perhaps unseating inflation as the topic du jour. (Vaccine mandates are also likely to come up.)

Optimism is also in shorter supply. FactSet reports that 56 companies in the S&P 500 have issued third-quarter guidance above what analysts expected, which is higher than average but down from 67 in the previous quarter. The number of companies issuing negative guidance rose to 47 from 37 the quarter before. Is this a problem? Analysts expect the S&P 500 index to rise by 15% over the coming year. This article originally appeared in The New York Times.

Our commenting policy has changed. If you would like to comment, please share on social media using the icons below and comment there.